Changes in student loans could mean savings for you

What do you get when you combine a rocky job market with soaring student debt? Student-loan defaults, and they're at the highest level since 1998.

This year's graduates are facing hiring freezes, and many of last year's have been laid off or are still struggling to find a well-paying job. Luckily, there's a bit of a silver lining: On July 1, important changes occurred for federal student loans.

Variable interest rates change and any new terms take effect on July 1 each year. But this year, not only are interest rates falling, but also a new repayment option is available.

Here's what you need to know:

Low income can equal low payments. A new repayment option, called Income Based Repayment (IBR), caps your monthly federal student-loan payments based on income and family size. If you make less than one and a half times the federal poverty level for your family size, your payment will be zero. (You can find the poverty guidelines at http://www.hhs.gov.) Anything you make above that is considered discretionary income, and your monthly student-loan payment will be 15 percent of that amount.

To find out your options, contact your lender. The best part is, after 25 years, any remaining balance is forgiven.

Your interest rate may go down. If you have a variable rate Stafford loan -- and you do if you took the loan out before July 1, 2006 -- your interest rate resets each year on July 1, as long as you haven't consolidated. This year, the interest rate is falling nearly two percentage points, to 2.48 percent. If you consolidate now, that change can save you thousands over the life of the loan, depending on your balance. Graduates in the Class of 2009 have an even better deal, says Edie Irons, communications director of the Project on Student Debt. "If you consolidate during your grace period, which is the six months after you graduate, you can lock in a rate of 1.88 percent."

New borrowers of subsidized (need-based) Stafford loans are also going to see lower rates. Because of the College Cost Reduction and Access Act of 2007, the interest rate on these loans for 2009-2010 is going to be 5.6 percent, compared with 2008-2009's rate of 6 percent. Even better, rates on these loans are going to continue to fall until they hit 3.4 percent in 2011.

Pell Grants are worth more. "The American Recovery and Reinvestment Act of 2009 increased the Pell Grant to $5,350 for 2009-2010," says Mark Kantrowitz, publisher of http://www.finaid.org. Pell Grants are awarded based on need, and they don't need to be repaid. To find out if you're eligible, you have to fill out the Free Application for Federal Student Aid, available at http://www.fafsa.ed.gov.

Take advantage of other perks. If you work full time in a public-service job, your Federal Direct Stafford loans, Federal Direct PLUS loans and Federal Direct Consolidation loans will be forgiven after 10 years. The range of public-service jobs is large and includes government jobs, public health, education, many social-work positions, public defenders, public librarians, law enforcement and firefighters, and employees of 501(c)(3) organizations.

SOURCE[Jean Chatzky is an editor-at-large at Money magazine and serves as AOL's official Money Coach]

GETTING PERSONAL: Student Loan Consolidation Good Option

This could be the right time to consolidate student loans.

A number of programs and interest rates change after July 1, offering a chance to lower costs and get better repayment options. That's good news for students, who are graduating with on average about $23,000 in debt, and of course for parents still supporting them.

Similar to refinancing, consolidating of student's federal loans can be done for no fee. It's also a good opportunity for advisers to discuss college costs with families. The financial crisis and tighter credit have left even high networth investors less confident about college savings.

If someone consolidates during the grace period - which is typically six months after graduation - the Stafford loan rate could drop to 1.88% from 3.61%. Someone already repaying loans could see the rate drop to 2.4% from 4.21%. The PLUS loans rate could drop from 5.01% to 3.28%, says Mark Kantrowitz, publisher of FinAid, a Website that tracks the college financial aid industry. Consolidation, he says, locks in the lower rates beyond the coming year.

"These rates are historically low rates, and we are unlikely to ever see rates this low again," he says.

Until July 2006, interest rates on federal students were at variable rates that could potentially climb to 8.25% for Stafford Loans and 9% for Plus Loans. The consolidated interest rate is a weighted average of the interest rates on the loans at the time of consolidation, rounded up to the nearest one-eighth of a percentage point. It cannot exceed 8.25%.

After 2006, the rates became fixed. The unsubsidized Stafford loans are now 6.8%. The subsidized Stafford loan is decreasing each year from 6.8% to 3.4%. (It is scheduled to return to the 6.8% rate if Congress does not act). The Plus Loans are now fixed rates at 8.5% for FFEL PLUS Loans or 7.9% for Direct PLUS Loans.

Another benefit to consolidation is that it is a requirement for some deferred repayment plans. Borrowers typically have from 10 to 25 years to repay loans, depending on the repayment plans they choose.

Extending payments may ease monthly expenses in the short term, but it could add significantly to the cost of the loan.

For example, repaying $230 a month at the Stafford rate of 6.8% will add $7,619 in interest to a $20,000 loan repaid over 10 years, says Kantrowitz. In contrast, extending that to 20 years with payments of $153 a month would add $16,640 to the $20,000 loan for $36,640.

Another option for grads after July 1, is a new income-based repayment plan. The program doesn't require consolidation, but it caps monthly payments at a certain percentage of the borrower's income.

"It's actually a very good plan for people experiencing financial difficulties," says Kantrowitz. "It's better for you than a forbearance."

Only a few companies still consolidate private loans. That's worth considering if the borrower's credit score has significantly improved - say more than 100 points - and may enable them to get a better interest rate.

Another potential benefit to consolidating a private loan is that it could enable someone to remove a co-signer such as a parent or relative from potential liability. This typically requires regular payments of 24 to 48 months.



(Jilian Mincer is a Getting Personal columnist who writes about personal finance; she covers topics including pensions, insurance, and college and retirement savings. She can be reached at 212-416-2239 or by e-mail at jilian.mincer@dowjones.com.)